'Profits, Norms and Power'

Chris Dillow:

Profits, norms and power, by Chris Dillow: Jesse Norman says companies have a duty not just to obey the law but to follow an ethic of good stewardship. Andrew Lilico and Stephen Pollard disagree. Implicit in this debate is something that should be made explicit - the role of corporate power.

Lilico and Pollard are following the tradition of Milton Friedman, who argued that "the social responsibility of business is to increase its profits."

This principle is an expression of the first theorem of welfare economics ... which says that rational self-interest will lead to socially optimum outcomes.

However, this is only the case under a particular condition - that companies' economic and political power is limited. ...

Now, here's the thing. When Friedman advocated profit-maximization as a socially optimal strategy, he did so at a time when firms faced countervailing power. In a pre-globalized era of strong unions, they couldn't easily maximize profits by paying lousy wages or offering degrading conditions, and they couldn't so easily dodge taxes. With their power limited, it was at least possible that profit-maximization did increase aggregate welfare. Friedman acknowledged this when he said that firms should "[conform] to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

But things have changed. Firms' bargaining power is now so great that there can be a tension between profit-maximizing and welfare. Maximizing profits now entails ducking taxes, paying wages which are regarded by many as unfair, and producing unpriced externalities such as risk pollution (pdf).This is exacerbated by the fact that "ethical custom", as perceived by capitalists and their apologists, tolerates such behaviour.

There are several possible responses to this:

- To ignore the role of power. Doing so, I suspect is an example of how beliefs, such as Friedman's, can persist after the conditions in which they were reasonable have disappeared.

- To think that power can be restrained by social norms, as Jesse does. It's a good conservative position, to think that free markets are welfare-enhancing if they operate within a particular moral code.

- To think legislation is necessary to rein in firms. This is the statist social democratic view.

There is, though, a fourth view - the Marxian one. This says that the tension between profit maximization and welfare hasn't increased simply because of a failure of law and morals, but because of a genuine shift in the balance of class power. Firms now have power and one thing we know about power is that it'll be used. Unless this changes, hopes of reconciling profit maximization with well-being might well prove mistaken.